The WSJ decided to highlight a 3-month old study to tell readers that everything is fine with the mortage market. While the study (by Christopher Cagan at First American CoreLogic) presents a reasonable breakdown of the risks of mortgage defaults, the problem with the WSJ assessment is that it is based on the assumption that house prices do not fall. If prices fall by 10 percent, then Cagan projects that the default rate would be more than 70 percent higher and the losses to the financial system would more than double. How plausible is it that house prices don't fall from their December 2006 level? Well, the National Association of Realtors data show that the median house prices has fallen 3.1 percent over the last year. The current inventory of unsold homes is 23.1 percent higher than at the same point last year. The vacancy rate for ownership units is more than 40 percent higher, which presumably means that there are many anxious sellers. Soaring foreclosure rates also mean more distressed sales. Add in the tightening of mortgage credit and slower economic growth than in 2006. Does anyone think that house prices won't fall in 2007?
--Dean Baker
